Novo Banco sale condition waived to allow Lone Star deal

LONDON, Oct 4 (IFR) - Portugal’s sale of a 75% stake in Novo Banco to Lone Star will go ahead after the US private equity firm agreed to waive the condition that at least three-quarters of the nationalised bank’s bondholders accepted a tender offer.

The liability management exercise was designed to raise at least €500m of capital. But the final results, released on Wednesday, showed just €4.74bn, or 56.6%, of the €8.37bn targeted accepted the deal, putting the sale by Portugal’s Resolution Fund potentially in doubt.

“The bank has decided to waive the minimum participation condition,” said Novo Banco in a statement.

“The Resolution Fund and Lone Star have agreed that...all conditions precedent to the agreement...have been satisfied or waived.”

Formal permission is still required from the European Commission, but the regulator has already given approval in principle to the deal.

Novo Banco said as a result it was proceeding with completion of the offer.

A source close to the deal said Lone Star had still got a good price.

“It has bought one of Portugal’s largest banks. A majority of the bonds accepted the offer and when added to the bonds that were transferred back to Banco Espirito Santo, they raised over €500m of capital,” said the source.

Novo Banco was the “good bank” carved out in 2014 from the remains of Banco Espirito Santo, which collapsed under a mountain of bad debt. In late 2015 several bond series were transferred back from Novo Banco to BES. Bondholders are still disputing that decision.

Litigation from bondholders who got a worse deal from accepting the latest exercise than those who successfully resisted the offer is not expected. Under the terms of the deal each of the 36 series of bonds targeted had to hold votes with at least 75% backing to bind in non-accepters.

Only 16 votes were successful, mainly shorter dated conventional bonds, and 20 failed. Novo Banco said the €600m of bonds that accepted the offer in the latter meetings would see these accepted for tender even though non-accepters would still see their notes untouched.

The unsuccessful votes were mainly for zero coupon bonds with lengthy maturities that had been issued at substantial discounts. Novo Banco had sought to buy back these bonds at around their market prices of 20 cents or so in the euro.

“I have no clue why certain zero coupon noteholders accepted the offer,” said the source. “The deal was poorly constructed. Rather than offering cash at a discount, these notes could have been given alternative instruments. That might have been more attractive to holders.”

Credit analysts at BNP Paribas said: “Bonds that have rejected the resolution measures should continue to trade higher while the bonds that have been CAC’d [subject to a collective action clause after a successful meeting], should trade at the tender level.”

This appears to be the case.

For example, a €400m February 2049 zero coupon note which had rejected the offer went up 1.88 cents, or 12.6%, on a cash basis to be bid at 16.74 cents in the euro, but a €335.8m zero with the same maturity that accepted the offer fell 0.18 cents, or 1.7%, to 10 cents bid.

After the offer was first outlined at the end of July, a group of bondholders said they held enough notes to block the whole exercise. They called for talks with the bank, with a view to changing the terms of the deal and possibly joining Lone Star and receiving equity in the bank.